Editor's Note: Tim Huet is a lawyer and director of the Center for Democratic
Solutions, a nonprofit in San Francisco that advises coops. This is an unabridged
version of Tim's article which appeared in GEO #30.Email Tim Huet. Tim can be reached at:
733 Baker Street, San Francisco, CA 94115; 415-346-8066.

North American advocates of worker cooperatives, and economic democracy in
general, have drawn much inspiration from the Mondragon cooperatives in the
Basque region of Spain. Launched in 1956, the Mondragon cooperative
complex has grown into a $2.5 billion dollar enterprise with over 30,000
workers and annual sales of $5 billion. The Mondragon experience has
provided confidence that cooperatives can develop on a large scale in all
fields of endeavor. However, that faith has been somewhat shaken by
Mondragon's recent deviations from cooperative principles with centralization
of decision-making and widespread hiring of non member workers, often in
joint-ventures with capitalist firms. Mondragon's management defends
these changes as necessary to survive intensified competition in the unifying
European and global markets.

Recent Mondragon experience bolsters the arguments of cooperative critics,
and the fears of some supporters, that once a cooperative reaches a certain
scale and affluence it loses its democratic character: management grows
unaccountable to a disorganized complacent membership and takes the business
towards conventional capitalist business practices. Perhaps more troubling
to cooperative supporters is the possibility that the Mondragon managers
are right: maybe it is impossible to face up to intensified capitalist global
competition and remain true to democratic cooperative principles.

In March of this year I went to Mondragon to investigate these matters.
In April I went on to a brief study tour of Italian worker cooperatives;
while less known in North America, the Italian movement is more extensive
than the Basque, with about a quarter million members in Italian worker
cooperatives.

The Mysterious Political Economy of Worker Cooperatives

That the Italian and Basque cooperatives have grown so large is somewhat
a mystery since, unlike
capitalist enterprises, cooperatives are not expansionist by nature.
Capitalist enterprises, like cancer,
appear to grow for the sake of growth, regardless of the effects wrought
on the surrounding
environment or people working within. Capitalist enterprises tend towards
growth because increased
scale generally leads to greater returns for a concentrated ownership.
To simplify, if a capitalist bakery
owner has a bakery with ten workers each earning $20,000/year but generating
$30,000/year of wealth,
the owner reaps $100,000 per year ($10,000 "profit" multiplied by ten
workers). The capitalist may
very well calculate that if she were to expand to own 5 identical bakeries,
she would reap $500,000 (50
workers each generating $10,000 of "profit"). The capitalist would
have to re-invest some of her initial
profits to get the bakeries up to the same level of profitability, but her
annual profits would eventually
multiply fivefold -- perhaps higher if she realizes some cost reductions
due to economies of scale.

Contrast this with the economics of a typical worker cooperative. In
a worker cooperative, those
profits not reinvested are divided among the workers who generated the
wealth. Assuming no
reinvestment, in addition to her $20,000 salary, each baker would receive
a $10,000 profit distribution
at the end of the year. Even if the cooperative were able to expand
with 4 identical bakeries, each baker
would still earn the same $20,000 salary with the $10,000 profit share.
Perhaps profit per member
would increase somewhat in the long-term because of economy of scale savings
but, to reach the
economy of scale savings, the original workers would have had to invest rather
than distribute their
initial profits. Thus, expansion generally results in an immediate
and substantial drop in the key
economic indicator for a cooperative, return per member, with the possibility
of a relatively small
increase in the future. Hence it is not difficult to see why the capitalist
owner has more economic
incentive to expand than does the cooperative.

There are also non-economic disincentives to growth for worker
cooperatives. For many a primary
benefit of working in a cooperative is being a respected, vital part of a
democratic community. As a
cooperative grows from 20 to 200 members, it may lose some of its sense of
community and
democratic involvement. No longer can everyone sit together every month
and make all the major
business decisions. As work functions become more specialized and the
business complex, it is
increasingly difficult to communicate and make decisions with anything
approximating equal
participation. If you work at multiple sites (e.g., bakeries) the lines
of communication and bonds of
trust/friendship will be even further stretched.

For all these reasons, worker cooperatives tend to stop growing once members
feel their business has
reached a healthy and productive size. Unlike capitalist cancers which
grow for their own sake and
destroy their host environment, cooperatives aim for homeostasis, a healthy
balance. Unfortunately
this pro-social characteristic of cooperatives can be a fatal weakness in
economic competition with
capitalist businesses. The cooperative grocer, bookstore, etc. enjoying
its homeostasis can be devoured
by a malignant capitalist growth (chain, mega-wholesaler, etc.). Small
cooperatives can demonstrate
the superior economic efficiency that results from their motivated workforce,
flexible use of human
resources, pride in quality work, rooted relationship in the community/customer
base, etc., but still lose
out when the price-slashing chain or mega-outlet comes to town -economic
efficiency is often crushed
under piles of money and advertisements.

And even if a worker cooperative wishes to grow, perhaps spurred by the
realization of a growing
capitalist threat, it will encounter special obstacles. It is true
that all small businesses, capitalist or
otherwise, are threatened by the growing scale of economic competition, but
cooperatives face
particular challenges of capitalization and acculturation when trying to
rapidly expand into a market
or "catch up."

Acculturation is always a challenge for democratic workplaces as they must
re-shape the
behavioral/thought patterns incoming workers have acquired from autocratic
employers and schools.
This process of democratic cultural development works best through a slow
process of absorption;
culture transfer may be very difficult if the workforce is suddenly doubled
by an influx of workers
ignorant of democratic management. It is a singular challenge to develop
a democratic culture from
scratch, which a cooperative might have to if it needs to develop branches
remote from its base.

Capital accumulation also naturally occurs slowly for worker cooperatives.
The people joining a
cooperative rarely can contribute much capital to the venture. Yet
cooperatives are limited in what
outside capital they can attract or accept. Conventional banks are
wary of lending to worker
cooperatives, those "commie groups lacking conventional authority and ownership
structures. And,
even if a cooperative can muster loans from understanding banks or individuals,
rapid expansion
generally requires an infusion of long-term equity investment; only under
special circumstances can
worker cooperatives internally generate sufficient equity, by reinvesting
profits, to power rapid growth.
Equity investors also have suspicions regarding "commie" cooperatives, but
practical concerns in
addition. One concern is that lack of a public market for the worker
cooperative's stock denies outside
stockholders an exit strategy for realizing increased worth. Moreover,
a cooperative, as a one-person-
one-vote democratic enterprise, will rarely be willing to give outside
stockholders their customary
voting rights. Even a worker cooperative willing to grant voting power
to outside shareholders will not
relinquish the majority of stock. Therefore, cooperatives are bereft
of the typical express route from
small business to major player: develop a strong product/approach and float
a public offering selling
perhaps 90% of the stock for a massive capital injection.

Given these obstacles, why have the Mondragon and Italian cooperatives grown
so extensive?

Mondragon: Background and History

The Mondragon cooperative movement was founded by a priest named Jose Maria
Arizmendiarrieta
(commonly called "Arizmendi"). When Arizmendi was assigned to the Mondragon
parish he found a
town devastated by the Spanish Civil War. He established a school for
the town's many working class
children without educational opportunity, providing vocational education
as well as moral guidance.
With Arizmendi's continuing tutelage, five of the schools graduates went
on to get engineering degrees
and, in 1956, start their own factory in Mondragon. This plant became
the Fagor cooperative.

Considering the isolated Spanish market of the Franco years, the cooperatives'
founders surmised that
any quality consumer product they could produce would find a ready market.
They were correct and
their domestic appliances company began generating sizable profits.
The cooperative developed a
system by which all profits were immediately reinvested in the business with
a minority of the profits
being credited to individual "capital accounts," which members drew from
only upon departure from
the cooperative. The discipline to reinvest heavily for expansion and
defer profit distribution was due,
in part, to a principled commitment to create jobs for the oppressed Basques
and, more generally,
further opportunities for democratic work. But ideology alone accomplishes
nothing; the Mondragon
cooperative founders developed a system that channeled and reinforced their
ideological commitment.

In 1958, the cooperatives encountered a crisis when the Spanish government
deemed members to be
self-employed and, hence, ineligible for the government system of social
security and unemployment
benefits. The cooperatives turned this to their advantage by creating,
at substantial savings, their own
social security system. In 1959, the cooperatives increased the advantage
by using the reserves of this
benefits system as seed capital for their own bank. The bank drew deposits
from community members
attracted not only be a competitive interest rate but knowledge that their
funds would be lent to the
cooperatives to create local jobs.

Representation on the bank's board of directors was distributed two-thirds
to the cooperative depositors
and one-third to bank staff. The bank's board became the de facto governing
body of the Mondragon
cooperative movement as the financial institution became both engine and
linchpin of the cooperative
movement. Through a Contract of Association with all cooperative members,
the bank set forth the
standard structures, practices, and principles the associated cooperatives
were to follow. The bank also
established a Business Division that promoted the development of new
cooperatives. In some cases,
the Business Division would identify a market opportunity and create a new
cooperative from scratch.
In other cases the division would assist a larger cooperative that would
-- to maintain efficiency and
democratic vigor -- shed off a division as a separate cooperative when a
certain size was established.
The bank also encouraged these smaller cooperatives to form groups with shared
services to maximize
economy of scale and marketing potential. In one case, the bank reorganized
existing consumer
cooperatives into hybrid worker-consumer cooperatives -- each constituency
having 50% of the voting
power -- and forged them as a united retail chain which has grown to be the
largest in Spain with
annual sales of $2.6 billion.

The record of business creation achieved is remarkable. of the 103 cooperatives
founded in the first
three decades of the Mondragon Experience, from 1956 to 1986, only 3
closed. This is
particularly impressive considering the deep recession suffered by Spain
from 1975 to 1985. While the
Basque region lost well over 100,000 jobs during this period, the Mondragon
cooperatives added
workers. In part, the cooperatives were able to do this by retraining
workers and transferring them
from depressed cooperatives to expanding ones. Credit is also due to
financial and managerial
assistance provided by the bank in restructuring troubled cooperatives.

While the cooperatives emerged from the recession stronger than ever, the
crisis provoked a process of reflection and restructuring that marked a new
phase in the Mondragon Experience. Following the
recession, creation of new cooperatives ground to a halt with resources devoted
to expanding the
existing cooperatives. One reason to accelerate the development of
existing cooperatives was the
entrance of Spain into the European Economic Community in 1986. The
cooperatives were gearing up
to compete in their "domestic" market with capitalist companies many times
their size.

A series of Cooperative Congresses were convened to address the changing
economic conditions. The
convening of Cooperative Congresses rather than planning change through the
bank was a significant
development in itself, flowing at least in part from a perception that the
industrial cooperatives were
overly dependent on the bank during the recession. The shift might
also reflect that the bank had
outstripped the growth of its associated cooperatives and, by 1985, less
than a quarter of the bank's
resources remained invested in those businesses.

At a critical 1988 gathering themed "Facing Up to the European Economic
Community," Cooperative Congress leaders considered shifting from their collision
course with the multinationals:

When we established our companies we paid no heed to multinational
consortiums, nor the Single European Market ... The fact is that the
products most important to the Group: domestic appliances,machine-tools ... etc., etc., are in most cases also those favored by
the big multinationals, and now, inthe new entrepreneurial confrontation which is on the horizon, we shall
have to measure up to acompletely different scenario which requires that we at least pause
to ask the following questions. Arethere any specific products
not favored by large capitalist companies? Is
it possible to find a marketsegment more accessible to worker
cooperatives due to their capacity to adapt, taking advantage oftheir
singular nature as community based companies? Would it
in any case be possible to adapt ourcompanies to a new product-market
relationship scheme if we saw that there was a redoubt which hadbeen
scorned by or was at least less accessible to, capitalist companies?

The Mondragon managers concluded that most of their key industrial
companies had "passed... the point of no return" -that they had invested
too much in their current products, machinery, etc. to radically
change course. Having committed themselves to competing
with the multinationals, they adopted characteristics of their rivals. Those
gathered concluded that quick centralized decision-making was necessary
to compete in a rapidly changing and complex global market. The
result was Mondragon Cooperative Corporation (MCC), incorporated
in 1990, a
centralized management and support body over three cooperative divisions
of finance, industry, and distribution (,'distribution" is a vertically
integrated system of agricultural and retail enterprises). Each
division has unified channels of distribution and marketing, utilizing
a common divisional trademark as well as the "MCC" identifier in
the global market.

Additionally, it was concluded that if MCC is to compete against large industrial
multinationals, it must
develop its own multinational supply and distribution network. MCC
has now established traditional
capitalist plants in such low-wage countries as Egypt, Morocco, Mexico,
Argentina, Thailand, and
China. Within Spain as well MCC has been developing businesses with
either strictly non-member
workforces, many of them joint ventures with capitalist partners. Even
in its traditional cooperatives,
MCC is using an increasing number of non-member workers. Approximately
one-third of MCC
workers are now non members. This far exceeds the original Mondragon
commitment that no
cooperative would employ more than 10% non members. In an interview,
the director of MCC's
temporary services cooperative informed me that a cooperative can now apply
to MCC for permission
to use up to 40% non-member workers. The justification for this change
is that the increased volatility
of the global market requires a more dispensable sector of the workforce.

MCC can provide many valid reasons -- cultural, legal, financial, and
organizational -- why it could not
expeditiously establish a sizable cooperative in Thailand or even central
Spain. But what most disturbs
critics/opponents is that MCC does not seem to be establishing these capitalist
operations with any
demonstrated intent for conversion to cooperatives. Indeed, circumstances
such as joint ownership
with capitalist partners may preclude cooperative conversion.

MCC's direction has generated considerable criticism from within the
ranks. In March of this year, the
elected Social Council for Fagor -- the largest and original cooperative
group in MCC -issued a strident
critique of MCC policy: {insert quote, still in translation}. one might ask
why, if there is such strong
internal opposition to MCC's policy and the cooperatives are democratic
enterprises, MCC's
transformation continues unabated. One part of the answer may be
that the centralized and expedited
MCC decision-making structure has removed meaningful opportunities for opposition
and
consideration of alternatives. From my exchanges with opposition
leaders, I would say another part of
the answer is that the opposition is not confident it can provide an alternative
-- they worry MCC is
correct that survival in the global market requires compromises of critical
cooperative principles.

However, even if one concedes that MCC must develop as a multinational, it
could do so with a
commitment to converting its overseas factories into cooperatives
gradually. This might involve
seeking partners in the social economy of other countries V willing to assist
in adapting and
encouraging cooperative culture in their homelands. A cooperative
approach to global
development might mean hiring native managerial talent rather than coupling
with a capitalist
company; or it may mean negotiating up-front with your capitalist joint-venture
partner for buy-
out rights to facilitate later cooperative conversion.

And perhaps it is possible for cooperatives to find a market niche even in
MCC's traditional
industries. The experience of Italian worker cooperatives may be
instructive. In the industrial
sector, Italian cooperatives have taken advantage of their labor flexibility
and dedication to quality
work to serve new niche markets created by the volatility of the global
market. The rapid
evolution of technology and the move toward just-ontime delivery systems
has created a demand
for small orders of customized industrial parts. Small to medium-sized
manufacturers with
highly-skilled work forces can band together in "flexible manufacturing networks" to
fill orders
that require multiple components and materials. While capitalist
businesses also participate in
flexible manufacturing networks, cooperatives are particularly adept at fostering
the critical
relationships because of their collaborative cultures. The small
size of the productive plants in
flexible manufacturing networks facilitates robust democracy for cooperatives
involved.

In the service sector, Italian cooperatives have taken advantage of their
community-based nature to
fill the vacuum left by privatization of social services. Moreover,
Italian cooperatives remain
leaders in a number of industries, including construction. Some of
the construction cooperatives
have thousands of members but retain a good deal of democratic involvement.,
As Bruno
Bruzagga, an officer of the largest Italian cooperative federation, explained
to me, "it would be a
mistake to make a generalization that the bigger the coop the less
participation;" describing a
cooperative of 2,500 workers in Bologna, he noted "this coop has more than
a few branches and
you can create smaller groups of members that then participate in meetings
and are delegates to
report on their findings." It is not simply a matter of size but how the
numbers are organized; the
challenge is to democratically coordinate the smaller bases of direct democracy.

Lessons and Applications for North America

The experience of MCC demonstrates the difficulty if not impossibility of
cooperatives competing
with multinationals in the industrial arena. Developing in the realm
of heavy industry is simply not an
option still available to a North American cooperative movement. Should
we then concede that worker
cooperatives can only develop in the crevices unreached by global capital
and that such is not even worthwhile?

I believe worker cooperatives have substantial economic potential today and
a critical role in our
future. The global industrial arena is not the only arena worth fighting
in. It is a postindustrial age
and this provides new opportunities for cooperatives. Like the Italians
we can utilize the community
orientation of cooperatives to fill in the holes left by the decay of the
old order and state. We can also
involve ourselves in the next wave of economic development, the
computer/knowledge sector, where
intelligent motivated workers often matter more than capital; there is a
democratic ethos developing
in the internet community that lends itself to cooperatives (in my role as
attorney, I have incorporated
two internet/computer cooperatives in the last few months: CLIQ Services
Cooperative,
www.cliq.com, and 4SD Consulting, www.intercoop.com).

Moreover, there are many areas of the current economy where small cooperatives
rooted in their
communities have an advantage, particularly if they are connected to a
larger cooperative network. I
am a member of a technical assistance cooperative that is helping to grow
from a highly successful
local business a cooperative chain of bakeries. These bakeries thrive
in part because the worker-
owners care about quality product/service and are able to connect with their
communities more than
the high turnover low-paid drones of capitalist chains. The technical
assistance cooperative and
bakeries constitute the Association of Arizmendi Cooperatives, an effort
to apply lessons drawn from
the positive and negative experiences of Mondragon (and other) cooperatives;
the Association aims to
provide technical support and economy of scale to a mutually-supporting network
of thriving
democratic businesses.

I believe the sum of these small or niche cooperative developments will be
of the greatest importance.
I harbor no illusions that cooperativism will gradually overtake capitalism
in a "free market"
competition. Only capitalism will bring down capitalism, collapsing
under its own weight, costs, and
contradictions. When global capitalism gives way, we must be able
to point to working examples of
economic democracy, of local economies that continue to function and serve
their communities;
purely theoretical arguments for economic democracy will be drowned out by
demagogic appeals to
fear and hunger. History leads me to dread the consequences if, once
crisis becomes collapse, we
cannot offer tangible hope for a more democratic society and economy.

Sidebar: The Role of Government in Cooperative Growth

A key to the flourishing of the Italian cooperatives has been political
support. The Italian constitution
recognizes the social contribution of cooperatives and directs that legislation
should promote and favor
cooperatives. Italian tax legislation treats worker cooperatives
as non-profit entities requiring surplus to be
invested for further job creation; i.e., in exchange for favorable tax status,
worker cooperatives are restricted
from distributing profits among current members in favor of reinvesting towards
new democratic employment.
Another interesting aspect of Italian tax law is that it requires 3% of each
cooperatives surplus to go into a fund
to develop new cooperatives.

The Spanish Constitution also endorses the value of cooperatives and financial
policy is starting to reflect this
with the creation of funds and tax benefits to promote worker
cooperatives. The Basque autonomous
government has embraced worker cooperatives with particular gusto: in July
of this year, the Basque
government contributed $18.3 million dollars to a fund specifically for
development of MCC cooperatives.
There are additional funds for cooperatives outside MCC.

It is important to understand that this outpouring of government support
is at least as much a result of
cooperative growth as a cause. The recent government support results
in part from recognition of the impressive
role cooperatives played in helping rebuild the Basque region and Italy following
the Spanish Civil War and
World War II. The Mondragon pioneers managed to thrive despite considerable
opposition from the Franco
regime and earned government backing through their independent success. This
should provide a lesson to
North America cooperators who feel legislative support/recognition is a
prerequisite to our flourishing.

Sidebar: Governance

The typical governance structure is quite similar for Italian and Mondragon
cooperatives. Each cooperative has
a board of directors elected at an annual meeting of its general assembly. Only
members of the cooperative are
allowed to be members of the board; top management, which is hired by the
board, is only allowed ex-officio
status in board proceedings. General assemblies often meet only once
per year but can be called more
frequently by the board or a set percentage of the members. General
assemblies adopt general policy which the
board and management are charged with executing; in practice general assemblies
often debate and commonly
accept proposals generated by the board and management.

The most dramatic governance difference between the two cooperative systems
is that Mondragon cooperatives
do not have unions whereas Italian cooperatives typically do. Traditional
labor issues of wages, hours, and working conditions are dealt with by Social
Councils in Mondragon cooperatives (Social Councils will also sometimes engage
in more comprehensive critiques of board/management direction).
While Social Councils occasionally serve as effective lobbying bodies to
change board/management policies, they have come under growing criticism
as advisory bodies with
no real powers to counteract an increasingly aggressive and "capitalist"
management agenda. I was told by Mondragon workers that this
situation has led to increased interest and organizing regarding unionization.